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Chicago is perhaps the best place in the country to see the impact, both good and bad, that Tax Increment Financing districts can have on a city. TIF districts - those peculiar redevelopment schemes that hold the line on current property taxes within a designated area, and then funnel all future property tax increases straight back into redevelopment (as opposed to financing basic public services) - were nearly always on standby during Mayor Richard M. Daley's tenure. At their best, Daley's TIFs solidified the tax base and quarterbacked increased development in certain areas, most vividly seen in the Central Loop TIF.

Begun by Mayor Harold Washington in 1984, when the Loop did indeed contain areas of blight, Daley extended the life of the Central Loop TIF to seemingly great effect. Before eventually expiring in 2008, the TIF district helped spearhead the Loop's renewal, ushering in an era of huge expansion that increased the tax base and businesses within its borders, and saw a rise in the estimated assessed land value in the district to $2.6 billion from its original $985 million. The renewed strength and vibrancy of Chicago's core allowed the city to comeback from its "buckle-on-the-Rust-Belt" lows, and become a relevant player on the Global City index.

Of course, the Central Loop TIF is but a tiny part of the story. While TIFs can be great vehicles of investment in neighborhoods, often they are not the simple fix for areas that they portend to be. For starters, the subjective assignment and creation of TIF districts skews the market and incentives for development where demand is inherent. In Chicago, where the disparity between TIF districts is immense, one man's blight is another man's aspiration. Nearly no one would argue with the fact that the destitute area surrounding the Ogden/Pulaski TIF district in the Lawndale neighborhood displays a greater need for subsidy-induced development than Chicago's Loop. Yet, Daley's downtown focus ensured that the "blighted" CBD continued to be invested via TIF well-beyond its logical expiration.

TIFs act as hedged bets that one development project will in turn spur other projects, and the endlessly upward arc of new development and commerce will pay for themselves. All the while, the services that neighborhoods within TIF districts rely on often get short shrift as tax dollars are held at artificially deflated levels, and costs are siphoned away from their original beneficiaries, such as schools. With the hope that the rising tide of development will one day allow for its coffers to be refilled, essential services become engulfed in red ink. But even in TIFs gone badly, there's nearly always a winner.

In a recent report for the Cato Institute, "Crony Capitalism and Social Engineering: The Case against Tax-Increment Financing," Randall O'Toole zeroes in on Chicago as the capital of "crony capitalism," where TIF funds in recent years have been used "to reward developers who supported him [Daley] and denied...to wards represented by aldermen who opposed him." While some may question the merit of that statement, O'Toole's scrutiny does point to the arbitrary nature of TIFs that determine winners and losers in the development landscape, without respect to the market demand that informs 1) where development should take place and 2) who can provide that development at the lowest cost.

As O'Toole notes, the problem is certainly not endemic to the City of Chicago. When Portland, OR created TIF districts alongside certain light-rail lines, Walsh Construction - the family-owned company of TriMet's then general manager Tom Walsh- was awarded most of the work. Large retail corporations like Bass Pro Shops and Cabela's have flexed their economic muscles to entice places from Kansas City to Fort Worth to provide millions of dollars in TIF subsidies to encourage their development. Such examples illustrate how development becomes determined by the political and monetary wherewithal of interested parties, leading to short-term gains for a relative few, while neighborhood services and amenities atrophy for the majority in the long-run.

While O'Toole goes on to criticize the use of TIF funds in the creation of new urban developments throughout the country, discounting the fact that true demand exists for such neighborhoods, conservative viewpoints like his (on TIFs, at least) actually align themselves with the demographic demands emerging for urbanism. Reforming TIFs to secure a solid definition of blight, setting a cap on the number of years a TIF district is in place, and restructuring the manner in which TIF funds are allocated so that they do not become slush funds of favoritism or take away from essential public services, is a way to build better-performing neighborhoods that will organically attract more investment. O'Toole advocates for the market to be left free and unfettered, and increasingly, the market wants to move to the city.

For Chicago - and elsewhere - the reform of TIF districts can lead to healthier, intact neighborhoods across a broader spectrum of the city. Simply connecting the dots between TIF funds and budget deficits, bringing to light the true costs that TIFs and other subsidies obscure, and reforming their operation can lead to an end of crony capitalism, finance neighborhood priorities, and help discourage the blight that TIFs may have meant to combat in the first place.

Update, 07/18/2011: A reader writes in with the following clarification concerning TIF Districts and schools: "In Chicago, TIFs don't actually take money away from other taxing districts such as schools. They do initially, but then the taxing bodies just raise their rates throughout the city to meet their tax levy. In effect, the increment in TIF districts are paid for through tax increases on everyone. Except they don't show up on your tax bill, and the spending isn't part of the public budget." This distinction is important to note, yet one could easily argue that by pointing out "the taxing bodies just raise their rates throughout the city to meet their tax levy," it is in essence money that is being siphoned away from the schools and other original taxing purposes through the districting.

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